Vital Signs December 2023: Healthcare Sector Outlook

VITAL SIGNS

Vital Signs Healthcare Sector Outlook DECEMBER 2023

VITAL SIGNS

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Explore the key themes impacting healthcare systems, owners and operators.

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS

3

VITAL SIGNS

The Healthcare Sector: Leasing Performance Remains Strong Despite Capital Constraints

This time last year, major topics included the budgetary pressures on healthcare systems, the tight labor market and moving beyond pandemic recovery. Now we face greater challenges as well as solutions as healthcare systems continue to face labor constraints and healthcare assets face restrictive equity and debt in the capital markets landscape. Long existing challenges with labor shortages and costs continue to plague the sector, with inflation, short staffing, long hours and contract labor driving healthcare unions to push for new agreements. While talent continues to flow into the sector, particularly as nursing and physician assistant roles grow in popularity, labor will be a continual challenge for the sector in the medium term. Impacts of tight labor markets, inflation and rising supply chain costs have had an acute effect on the expenses of hospitals and health systems around the country. Health systems first began to experience this pain last year and it has only become more pointed with an overall slowing economy. In the first half of 2023, Syntellis Performance Solutions reported that operating expenses grew by 8.3%, continuing a post pandemic trend. At the release of our previous edition of Vital Signs, revenues were also down— since the beginning of 2023 they have risen by 12.5%, outpacing expense growth, according to Syntellis. Growing operating revenues from rising patient encounters and outpatient operations recently led Moody’s to upgrade the sector’s rating. Additionally, most pandemic-era federal

and state support funds have expired, adding further stress to hospital operating budgets . As of 2022, the American Hospital Association estimates 33% of hospitals were operating at a negative margin . As this trend is expected to continue in the short term, health systems have been forced to make difficult decisions or delay investment in capital expenditures, new real estate projects and consolidation opportunities. Despite these challenging conditions, there are some silver linings. Healthcare systems have begun to reassess their real estate portfolios to evaluate and consolidate administrative space that may have become underutilized with the adoption of hybrid and remote work. Additionally, healthcare operators, health systems and new entrants in the space have been eyeing well-located but vacant or financially distressed office assets that may be ideal candidates for conversion to clinical uses. In Northern Virginia, for instance, Virginia Hospital Center recently acquired 3601 Eisenhower Blvd., a 145,000-square-foot (sf) traditional office building, for $21.5 million—a 43% discount from what owner Monday Properties had paid for the same asset in 2018 1 . Virginia Hospital Center plans to convert the asset into an ambulatory surgery center and medical office building (MOB). However, this trend will take time to fully manifest, as only a relatively small number of office assets have both an ideal location and adequate infrastructure, including floorplate sizes, for clinical medical uses.

Healthcare systems have begun to reassess their real estate portfolios to evaluate and consolidate administrative space that may have become underutilized with the adoption of hybrid and remote work.

1 Commercial Observer, November 2023: “ Virginia Hospital Center Acquires Alexandria Office Building at Major Price Cut”

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS

Leasing in most markets has therefore maintained strong momentum this year. Occupancies continue to remain above 90% and rent increases—while tempered—remain generally between 2-3%. Despite these strong real estate fundamentals, the medical office capital markets landscape, like commercial office capital markets, has been particularly challenging, as limited liquidity and cautious capital have slowed transaction volumes dramatically.

Despite these headwinds, the overall healthcare sector continues to be supported by robust secular drivers, as overall healthcare spending is expected to continue to expand with a growing population entering the 65-and-older age cohort. This demographic tailwind, along with the patient demand for healthcare services and desire for convenient access to care, likely will buoy medical office through recent market turmoil.

U.S. Healthcare Spending: Historical & Projected

$0 $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000 $8,000,000

Healthcare Spending in $Ms

2011

2017

2012

2021

2015

2013

2018

2016

2019

2014

2001

2010

2027

2022

2025

2023

2028

2026

2029

2024

2007

2002

2020

2005

2003

2030

2008

2006

2009

2004

2000

Year

Source: CMS, Cushman & Wakefield Research

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VITAL SIGNS

Shifting Specialties: Site-of-Care on the Move

With rising demand for outpatient treatment across patient groups, hospitals and MOB operators will need to pay particular attention to which specialties are gaining the most traction in outpatient settings. Historically, outpatient facilities were viewed as options for minimally invasive procedures. Now, patients increasingly seek the convenience and flexibility of outpatient clinics that may be more convenient than a primary health system campus. The Advisory Board has forecasted that total inpatient volumes are expected to dip slightly— down by just less than a full percent (by 0.7%) by 2027—but grow modestly by nearly a percent (0.9 percent) by 2032 2 . Outpatient volumes, however, are expected to increase 10% by 2027 and 18.7% by 2032. Nearly every specialty is expected to see growth in outpatient services, with two critical exceptions: obstetrics (expected to decline by 10% over the next five years, and 18.7% over the next 10 years; and pulmonology, which the Advisory Board expects to decline by 3.4% in five years and 7.9% in the next 10 years). The largest outpatient volume increases are projected to be in psychiatry,

podiatry, orthopedics, ophthalmology, vascular, spine, physical therapy and rehabilitation, and endocrinology. Advancements in clinical care have helped propel much of this growth, allowing for ever more complex procedures to be completed in outpatient settings. Even cardiology is expected to see significant growth—12.8% over five years and 20.7% growth over 10 years in outpatient procedures, as once–inpatient-only procedures, such as electrophysiology, shift to outpatient status. The rise in outpatient procedures is expected to provide growth for the medical office sector, though how much net new medical office space will be needed, as “inpatient” and “outpatient” designations are distinctions based on how procedures are classified for reimbursement, rather than purely geographic or locational ones. Many joint replacements, for instance, are actually performed in hospital facilities, and patients may be admitted for an overnight stay even though the procedure itself is reimbursed as an “outpatient procedure.”

2018 - 2023 Outpatient Growth by Specialty

Dermatology Neurosurgery Trauma Radiology Thoracic Surgery Neurology Evaluation and Management Nephrology ENT Miscellaneous Services Lab Pain Management Cardiology Podiatry Ophthalmology Orthopedics Vascular Physical Therapy/Rehabilitation Spine Psychiatry Endocrinology

23.9%

18.5%

16.5%

15.8%

14.2%

12.8% 12.8% 13.0% 13.1% 13.3%

12.3%

10.9%

10.4%

7.6% 8.1%

6.6%

6.0% 6.1% 6.2%

5.7% 5.7%

Obstetrics Pulmonology Gynecology Urology Cosmetic Procedures Gastroenterology General Surgery Oncology

4.9% 4.9% 5.0%

4.2%

3.8%

1.7%

-3.4%

-10.0%

-15% -10% -5% 0% 5% 10% 15% 20% 25% 30%

Source: The Advisory Board, Cushman & Wakefield Research

2 The Advisory Board, August 2023: “Provider Volume Forecast Update”

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS

Labor Challenges: Shortages, Specialization and Strikes

Labor availability in the healthcare space has been a perennial issue for more than a decade. Both healthcare professionals and hospital support staff are constrained talent pools, from doctors to custodians. Because of this, many healthcare systems increasingly utilized contract labor between 2020 to 2022—typically in the form of travel nurses—to help bridge staffing gaps. While successful in providing staffing, the reliance on travelers further increased costs to systems in the immediate post-pandemic period. As the labor cost pressures have mounted, hospitals have been pressed to end these costly contracts. According to Becker’s, 47 hospital executives have called labor costs “crippling,” and some systems have reduced their labor costs by over half through ending contract labor and other layoffs. All told, the healthcare sector laid off over 40,000 people (inclusive of both healthcare workers and support

staff) nationally in the first half of the year. And yet, patient and health system demand still point to a substantial number of care providers needed over the coming years. Indeed, despite the layoffs, the healthcare sector added 63,000 healthcare workers and supporting jobs in July , pointing to a continuing overall shortage in labor. Health systems are now recognizing that paying high premiums for contract labor is financially imprudent in the new landscape. The demand for nursing professionals continues to outpace the supply, and this is compounded with challenges of an aging population, nurse retirements and burnout, and increased specialty needs. This shortage not only strains existing healthcare facilities but also limits potential growth of new healthcare facilities, as adding facilities often requires adding staff.

Despite healthcare systems reducing contract labor to control costs, the sector still added 63,000 jobs in July.

7

VITAL SIGNS

Beyond nursing, the shortage extends to other healthcare professions, including physicians and physician assistants. The demand for primary care physicians, specialists, and advanced practice providers has intensified, leading to concerns about access to timely and comprehensive healthcare services. Job postings for many of these roles reached record highs in 2022 and have moderated somewhat in 2023 as hospitals look to control labor expenses. This trend can also be seen in the overall trends in healthcare labor pools. Over the past two years, we’ve seen job counts for doctors soar in response to the pandemic, with similar substantial growth in administrative roles. Growth rates for nurses as well as assistant & technician roles have been more moderate, ranging from 2.1% - 2.5%. Going forward, we can expect the labor pool to increase on an approximately 2% annual basis across healthcare

provider professions while administrative roles grow at a 3% rate, according to Lightcast. Inflation, staff shortages and long shifts have driven a number of unions to strike and push healthcare systems to the negotiating table. While most of these labor strikes have since been resolved, they have added another cost pressure on hospitals. Fortunately, projections for talent are growing in the healthcare space, with talent estimated to surpass available space in the coming years. Quarterly deliveries for healthcare assets typically grow at a rate between 1% to 2% of existing inventory. Since the end of 2022, employment for both hospitals and physicians’ offices is growing between 3% and 4% to meet rising demand. This would suggest both a skilled and support labor pool that is growing, as well as future demand for additional space.

Employment for hospitals and physician offices has been growing at a faster rate than than newmedical office volume.

Healthcare Employment Growth vs. Healthcare CRE Volume Growth

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

-8%

MOB Volume Growth % YoY Physicians Office Employment % YoY Hospital Employment % YoY

Source: RevistaMed, Moody’s Analytics, Cushman & Wakefield Research

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS

Doctors and Admin roles surged in 2021 - 2022, growth will stabilize going forward - but will be net positive across role types.

Healthcare Jobs % YoY Change

10%

8%

6%

4%

2%

0%

-2%

-4%

-6%

2019

2020 2025 Doctors Nurses Assistants & Technicians Other Healthcare Admin 2021 2022 2023 2024

Source: Lightcast, Cushman & Wakefield Research. Other Healthcare primarily encompasses therapists, dentists and pharmacists as well as other professions.

Job postings for nurses, assistants and technicians reached record highs last year.

Job Postings

350,000

300,000

250,000

200,000

150,000

100,000

50,000

0

Doctors

Nurses

Assistants & Technicians

Other Healthcare

Admin

Source: Lightcast, Cushman & Wakefield Research. Other Healthcare primarily encompasses therapists, dentists and pharmacists as well as other professions.

9

VITAL SIGNS

Hospital Budgets Under Stress: From a Challenging Landscape to a Pathway to Performance For hospital operating margins, 2022 was one of the most difficult years on record, and that trend looked to carry through this year as well. Healthcare systems around the country were beset with inflation, labor shortages, high contract labor costs, reduction in positive margin procedures, increase in negative margin procedures, along with vanishing federal support funding. This resulted in many systems reporting net losses in the billions during fiscal year 2022.

Major Health Systems – Recent Financial Performance Q1 2023

10% 15% 20% 25%

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2

0% 5%

-25% -20% -15% -10% -5%

Operating Income $B (LHS)

Operating Margin % (RHS)

Source: Becker’s Hospital Review, The Advisory Board (and respective hospital systems), Cushman & Wakefield Research

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS

Hospital Operating Margins YTD by Month

As healthcare systems took stock of their losses, they developed plans to help reduce further losses in 2023. Firstly, many hospitals began renegotiating their agreements with payers for higher reimbursements that better match up to expected procedures. For their part, payers have begun to pass on these cost increases to purchasers (employers and ultimately their employees) in the form of higher premiums. Simultaneously, these systems have sought other efficiencies, such as shedding unnecessary administrative space or outlying, low-performing clinical space. With these operational modifications, hospitals have begun to regain some positive performance indicators, breaking into the positive operating margin territory in March 2023. Since then, operating margins have been between 0.5% and 1%, which suggests that there remains some level of fragility in the sector.

2%

1%

0%

-1%

-2%

Jul-23

Jan-23

Jun-23

Oct-22

Mar-23

Apr-23

Sep-22

Sep-23

Feb-23

Dec-22

Nov-22

May-23

Aug-23

Source: Kaufman Hall National Hospital Flash Report, American Hospital Association, The Advisory Board

Hospital operating margins have recently been improving, as cost cutting measures and adjustments to revenue strategies take effect.

Revenue & Expense Trends for Medical Office Buildings

0% 1% 2% 3% 4% 5% 6%

2017 Q2

2021 Q2

2018 Q2

2016 Q2

2019 Q2

2017 Q4

2021 Q4

2018 Q4

2016 Q4

2019 Q4

2022 Q2

2023 Q2

2022 Q4

2020 Q2

2020 Q4

NOI Growth

Revenue Growth

Expense Growth

Source: Revista Med, Cushman & Wakefield Research

Since 2021, revenues and expenses have grown dramatically in the healthcare real estate sector. Inflation, rising labor costs and supply chain challenges have all triggered expenses to increase as much as 5.5% as of the third quarter of 2023. Simultaneously, revenues have risen quickly as well, reaching 3.2%. Fortunately, expense growth has begun to level through 2023, falling to 5.1%, while revenue has continued to rise, reaching 3.4% as of the third quarter of 2023. Critically, NOI growth for healthcare remains robust, with growth running between 2.5% and 3% from 2021 through 2023.

11

VITAL SIGNS

Update on Medical Office Building Performance

Leasing Markets After occupancies had slightly fallen off in 2020, there has been noticeable growth over the past three years. As of the third quarter of 2023, occupancy for MOBs across the U.S. is largely stable at 91.2%. Leasing activity has increasingly moved to higher-quality assets in the medical office space. Demand for clinical space remains quite robust, as health systems and physician practices continue to lease space. Several key themes have manifested in the market: • Move-in ready space remains highly sought after in most markets, particularly for physician practices, as construction costs and supply chain shortages remain challenging, and operating margin pressures persist. • With capital requirements exceeding tenant improvement (TI) allowances, average lease terms have extended a bit, to allow some to amortize additional TI costs over the now-longer lease term. • In certain markets, commercial office landlords have lured some physician tenants with concessions and TI packages. These incentives mirror what these landlords would have offered to standard fare office tenants, but they are now targeting price-sensitive physicians. • The Sun Belt continues to see the most active leasing markets for healthcare assets.

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS

Better Located, Larger Assets Performing Strongly

Construction in the market has begun to consistently lag behind absorption. The nature of the healthcare asset—highly specified tenants and use cases—often lends to the majority of product being build-to-suit or pre-leased at very early stages. Construction-wise, we have seen certain markets witness a construction boom. For example, the Phoenix market is expecting 38 MOBs with 2.4 million square feet (msf) to deliver

during the next five years. Each quarter for the past two years, the market has averaged 500,000 sf in projects that have initiated construction. Over 1.0 msf has been proposed in the Phoenix submarket of Gilbert alone. This demand has been supported by the expansion of care delivery locations across the sprawling metro Phoenix area, as well as growing hospital requirements, starting at 1.0 msf of total new space last quarter.

MOB Occupancy, Deliveries and Absorption 2018 - 2023

93.0%

6

92.5%

5

92.0%

4

91.5%

3

91.0%

2

Millions SF

% Occupancy

90.5%

1

90.0%

0

Completed SF (LHS)

Absorption SF (LHS)

Occupancy Rate (RHS)

Source: RevistaMed (Completions, Absorption, Occupancy based on Top 50 Markets, 7,500+ sf MOBs), Cushman & Wakefield Research

Demand for clinical space remains quite robust, as health systems and physician practices continue to lease space.

13

VITAL SIGNS

Medical Office Buildings: Capital Markets Update

As the availability of liquidity has become limited in the current rate environment, transaction volumes have fallen as was outlined in last year’s Vital Signs. With fewer properties trading, there were relatively few data points of activity for most of the year. However, we finally saw a major merger of two substantial entities. Physicians Realty Trust (aka DOC REIT) and Healthpeak Properties announced their partnership in an all stock merger in Q4 2023. The combined entity is expected to total $21B in value and result in a 52 msf portfolio composed primarily of 40 msf of outpatient properties across the Sunbelt markets of Dallas, Houston, Nashville, Phoenix and Denver. The deal is expected to close in Q1 2024. Removing this merger and the associated commercial real estate acquisitions, the total sales volume through Q3 2023 was below $2B –an almost 65% drop from Q3 2022. The impact of rising interest rates has had a cooling effect on

transaction volumes over the past year. However, as rate pressures lessen, this situation should prove to be temporary and recoverable. MOB cap rates, which had in recent years compressed at a greater rate than other asset types such as office, reached a 5.5% national median low point in Q1 2022. As of Q3 2023, cap rates have increased to nearly 7.0%. The reason for the rise in cap rates is two-fold; the rising cost of debt and investor’s unwillingness to accept negative leverage has pushed rates upward. Recently, the rise in the 10-year treasury yield has pushed rates further upward. The composition of deals has also begun to shift: more dispositions are occurring from motivated sellers with assets that are either distressed or were unable to achieve attractive financing. As a result, spreads remain historically low for healthcare assets, and fairly in line with expectations for traditional real estate asset classes.

Medical Office Buildings: Transaction Volume by Quarter

$450

$8B

$400

$7B

$350

$6B

$300

$5B

$250

$4B

$200

$3B

$150

$2B

$100

$1B

$50

$0

$B

20Q1 20Q2 20Q3 20Q4 21Q1 21Q2 21Q3 21Q4 22Q1 22Q2 22Q3 22Q4 23Q1 23Q2 23Q3 On-Campus Sales Volume ($) Off-Campus Sales Volume ($) On-Campus Avg Price ($/sf) Off-Campus Avg Price ($/sf)

Source: Revista Med, Cushman & Wakefield Research

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS

Medical Office Avg Cap Rates and Spreads

700

7.0%

600

6.5%

500

6.0%

400

5.5%

300

5.0%

200

4.5%

100

4.0%

0

3.5%

Spread - Office (RHS)

Spread - MOB (RHS)

MOB Cap Rate (LHS)

Source: Revista Med, FRED St Louis, Cushman & Wakefield Research, RCA

In the last two years, private equity companies have continued to be more active than other institutional buyers. The exceptions to this are the two major REIT mergers of 2022-2023, which executed a multi-billion-dollar deals. Excluding these REIT mergers, over 70% of deals conducted this year were purchased by private equity players. This involvement is likely to grow, and beyond

just healthcare real estate, with cost pressures on healthcare systems potentially limiting their ability to acquire physician practices at their historical pace. As dry powder for investment builds on the sidelines, awaiting changes in market conditions, the strong fundamentals of the space point to healthcare as one of the areas to rapidly regain transaction activity when rate issues subside.

As of Q3 2023, cap rates have increased to 6.8%, with spreads against the 10-yr Treasury falling to 220 bps.

15

VITAL SIGNS

Push to Consolidate in the Face of Growing Pressure As predicted in the previous edition of Vital Signs, M&A activity continued into 2023 with several major transactions. Given the importance of scale for controlling costs, negotiating contracts with payers, and establishing a diversified market footprint, we’ve seen growing conglomeration in the healthcare sector. In its quarterly review of Healthcare Mergers and Acquisitions, Kaufman Hall noted that Q3 2023 saw 18 announced mergers, significantly higher than 2022. The report notes that “14 of the 18 announced transactions in Q3 2023 involved not-for-profit acquirers, and of those 14, 50% were academic or university-affiliated health systems.” The report further noted that financial distress was one of the chief motivations for merger activity among health systems: “For many smaller to medium-sized health systems, the upward reset in fixed costs—including both labor and non-labor expenses—is a particularly acute problem. Their relative size constrains their ability to spread these costs across a larger number of facilities and services. We are seeing continued activity among systems with annual revenues in the range of $250M to $750M that have sought a partner. What is new in recent quarters is the number of larger systems—those with annual revenues of $1B or more—that also are citing financial distress as a driver for their decision to partner.” 1 This year saw somewhat further consolidation in the healthcare provider space, though the capital markets landscape has also had a tempering effect on this front. St. Louis-based BJC Healthcare has announced a planned merger with Kansas-City based St. Luke’s Health System to create a $10B entity that would total 28 hospitals as the primary healthcare system of Missouri. In Michigan, Henry

1 Kaufman Hall Q3 2023 Hospital Activity Report: https://www. kaufmanhall.com/sites/default/files/2023-10/KH-MA_2023_Q3 Activity-Report_Final.pdf

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS

Given the importance of scale for controlling costs, negotiating contracts with payers, and establishing a diversified market footprint, we’ve seen growing conglomeration in the healthcare sector.

Ford Health and Ascension Michigan announced a merger that will create a $10.5B entity totaling 50,000 employees and over 550 locations. Elsewhere, other hospital mergers have been eyed but have yet to move forward. Meanwhile, several notable retailers have made significant investments into primary care providers. Perhaps the most notable was CVS’ acquisition of Oak Street Health and Signify Health in back-to back months during Q1 2023. This continued the vertical integration strategy that the ‘payvider’ (insurers/payers providing direct healthcare through their own clinical teams) entity of CVS and Aetna had begun to build over the past several years. Through the Oak Street acquisition, CVS enters almost 170 locations across 21 states for $10 Bwith the Signify Health acquisition totaling $8B for a home-based primary care provider at scale. This follows earlier M&A activity from

Amazon and Walgreens listed below. In many of these cases, buyer entities sought to build out a substantial platform that could synergize with any healthcare offerings, retail / medtail platforms, and any payer affiliations. CVS’ partnership with Aetna plans to convert portions of CVS retail outlets to medical office under the branding of HealthHUB— combining this with the shuttering of 900 stores to drive traffic to key locations. In addition, UnitedHealthcare’s Optum Health vertical acquired Kelsey-Seybold Clinic, enabling regional growth in the Texas market, with further potential targets on the market. Continued cost pressure on healthcare systems will likely drive continued agglomeration into 2024, with buyers ranging from well-capitalized health systems to payviders to institutional capital with existing medical partnerships.

Major Acquisitions

Conglomerate Target

Price Date Locations Target States

CVS

Oak Street Health $10.6B May-23 169

AL, AZ, CO, GA, KY, IL, IN, LA, MI, MS, NC, NJ, NM, NY, OK, OH, PA, SC

Kaiser Permanente

Geisinger Health $5B May-23 289

DE, ME, PA

Amazon

One Medical

$4B Feb-23 188

AZ, CA, CO, CT, DC, FL, GA, IL, MA, NC, OH, OR, TX, WA

Walgreens / VillageMD

Summit Health

$9B Nov-22 370

CT, NJ, NY, OR, PA

UnitedHealth / Optum Health

Kelsey-Sebold Clinic $2B Sep-22 40

TX

Source: The Advisory Board, Cushman & Wakefield Research

17

VITAL SIGNS

Conclusion As rates and costs have risen in 2023, the healthcare sector committed to some major adaptations that offer some resiliency in the current environment. Health systems have actively worked with health plans and employers to better match care to cost. Against this backdrop, healthcare real estate has performed robustly from a leasing perspective. Occupancy remains near or above historically stable levels, and substantially higher than other major CRE asset classes, including commercial office. Absorption of new deliveries has also continued apace, with very little exits from committed projects. Despite a slowing construction pipeline, a growing labor pool and patient demand will continue to drive newer and well-amenitized healthcare spaces. In the face of past economic headwinds, the healthcare industry has been noticeably resilient. With healthcare spending set to linearly increase over the next eight years , we can expect rising demand for care nationwide—providing opportunities for continued growth of their offerings. As demand for outpatient care grows, MOB operators and health systems can continue to expand options for clinical care while adapting their real estate portfolios for greater operational efficiencies. The reduction in underutilized administrative space, the conversion of adjacent office to further clinical uses at a discounted price, and centralizing

care when hub-and-spoke becomes too operationally challenging are key steps operators are taking. The greatest challenge to the execution of some of these portfolio adjustments remains the slowing capital markets landscape. As with almost all other real estate asset classes, the healthcare sector will also need to wait out the doldrums of interest rate increases and stagnant liquidity. Owners and existing investors should take note that significant amounts of dry powder remain interested in the sector and have indicated that they are ready to move, once conditions improve. When that happens, asset owners should be prepared to move quickly on either further acquisitions or development plays. Ultimately, the challenges that the healthcare sector currently face are opening opportunities for both healthcare providers, who can devise novel strategies to address the immense and growing need for care in the nation, and healthcare real estate investors, who can navigate the crosscurrents of the capital markets, limited medical office building stock, and continued evolution in the manner and location of care delivery.

VITAL SIGNS 2022: PERSPECTIVES ON HEALTHCARE AND MEDICAL OFFICE BUILDINGS

As rates and costs have risen in 2023, the healthcare sector committed to some major adaptations that offer some resiliency in the current environment.

19

VITAL SIGNS

Contributors Lorie Damon

About Cushman & Wakefield Cushman & Wakefield (NYSE: CWK) is a leading global commercial real estate services firm for property owners and occupiers with approximately 52,000 employees in approximately 400 offices and 60 countries. In 2022, the firm reported revenue of $10.1 billion across its core services of property, facilities and project management, leasing, capital markets, and valuation and other services. It also receives numerous industry and business accolades for its award winning culture and commitment to Diversity, Equity and Inclusion (DEI), Environmental, Social and Governance (ESG) and more. For additional information, visit www.cushmanwakefield.com.

Executive Managing Director, Healthcare Advisory Practice lorie.damon@cushwake.com Jacob Albers Head of Alternatives Insights, Global Think Tank jacob.albers@cushwake.com

© 2023 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources believed to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy.